Exemptions from Open Offer (Regulation 10)

The mandatory open offer is the disciplinary spine of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Yet an unbending rule that every crossing of the 25% threshold or every assumption of control must culminate in a costly public offer would strangle ordinary, benign and structurally non-abusive transactions. Regulation 10 is the relief valve. It enumerates a catalogue of automatic exemptions — acquisitions that escape the obligation under Regulation 3 and Regulation 4 by force of the regulation itself, without any application to or order from the Board. Mastering Regulation 10 means knowing precisely which boxes a transaction must tick, because the exemption is conditional, narrowly construed, and forfeited the moment a single pre-condition is missed.

The scheme of Regulation 10: automatic, conditional, self-executing

Regulation 10 opens with the words that the acquisitions specified in it 'shall be exempt from the obligation to make an open offer under regulation 3 and regulation 4 subject to fulfilment of the conditions stipulated therefor.' Two features of that language are decisive. First, the exemption is self-executing or automatic: unlike the discretionary relief the Board grants on application under Regulation 11, no order is required and no approval is sought — the acquirer simply satisfies the conditions and reports the transaction. Second, the exemption is strictly conditional. The phrase 'subject to fulfilment of the conditions stipulated therefor' is not decorative; it is the hinge on which every exemption turns. If any one condition is unmet, the umbrella of Regulation 10 disappears and the open offer obligation revives in full.

This is why Regulation 10 is best read alongside the triggers it relieves. Regulation 3 generates the obligation when an acquirer, with persons acting in concert, crosses 25% of voting rights, or makes a creeping acquisition beyond 5% in a financial year while already between 25% and the maximum permissible non-public shareholding. Regulation 4 is the control trigger — irrespective of any shareholding change. Regulation 10 then asks: notwithstanding that a Regulation 3 or 4 event has occurred, is the transaction of a kind the regulator regards as non-abusive? If yes, and the conditions hold, the offer is excused.

The architecture matters for exam answers. A common error is to treat Regulation 10 as defining when no trigger arises. It does not. The trigger arises; Regulation 10 merely exempts the consequence. A transaction may simultaneously be a Regulation 3(1) acquisition and a Regulation 10(1)(a) inter se transfer — both true, with the latter neutralising the former.

Inter se transfers among qualifying persons — Regulation 10(1)(a)

The most heavily litigated exemption is Regulation 10(1)(a), which exempts acquisitions made by way of transfer of shares inter se (that is, between) certain related categories of persons. The rationale is that movement of shares within an already-aligned family, promoter group or controlled group does not change the locus of control or disenfranchise public shareholders, so a public offer would be pointless. The clause sets out qualifying relationships in sub-clauses (i) to (v): (i) immediate relatives; (ii) persons named as promoters in the shareholding pattern filed by the target company for not less than three years prior to the proposed acquisition; (iii) a company, its subsidiaries, its holding company, other subsidiaries of such holding company, and persons holding not less than fifty per cent of the equity shares of such company, where control over the company is held by the same persons before and after the transaction; (iv) persons acting in concert for not less than three years as disclosed under the listing agreement, and their group entities; and (v) shareholders of a target company who have acted in concert for three years and any company whose entire equity capital they own in the same proportion as their holdings in the target.

Crucially, sub-clause (a) is gated by a proviso on pricing and disclosure. The transferor and transferee must have complied with the disclosure obligations in Chapter V (Regulations 29 to 31), and — for frequently traded shares — the acquisition price per share must not be higher than twenty-five per cent over the volume-weighted average market price for sixty trading days preceding the date of issuance of notice to the stock exchanges, the difference being computed in the manner the regulation specifies. The exemption thus polices not only who transfers but at what price, preventing inter se transfers from being used to siphon value at off-market rates.

The three-year promoter rule and the Arbutus litigation

Sub-clause (ii) — inter se transfer between persons 'named as promoters in the shareholding pattern filed by the target company in terms of the listing agreement... for not less than three years prior to the proposed acquisition' — has produced the most important Securities Appellate Tribunal authority on Regulation 10. In Arbutus Consultancy LLP v. Securities and Exchange Board of India, the promoters of RattanIndia Infrastructure Limited (whose shares were listed on 30 July 2012 following a demerger from Indiabulls Real Estate) effected inter se transfers between July and October 2014 — roughly two years after listing — and claimed exemption under Regulation 10(1)(a)(ii). They argued that their continuity of promoter status in the predecessor entity should count towards the three years.

The SAT rejected the liberal reading. It held that the three-year period must be reckoned from the shareholding patterns actually filed by the target company in terms of its listing agreement; promoter tenure in a predecessor or demerged company cannot be aggregated. Because RattanIndia had been listed for under three years, no shareholding pattern satisfying the requirement existed, and the exemption was unavailable. The Tribunal applied a literal construction, reasoning that the conditions of an exemption must be strictly satisfied and cannot be stretched by purposive sympathy.

The decision also addressed SEBI's earlier Weizmann Forex Limited informal guidance, which had taken a purposive view permitting aggregation. The SAT held that an informal guidance is not binding on the Board, cannot override the plain text of the regulation, and provides no defence to non-compliance. For aspirants, Arbutus is the anchor case for two propositions: exemption conditions are construed strictly, and SEBI informal guidance carries persuasive value at best, never binding force.

Acquisitions in the ordinary course of business — Regulation 10(1)(b)

Regulation 10(1)(b) exempts a list of acquisitions arising in the ordinary course of regulated business, where the acquirer holds shares fleetingly or in a fiduciary/market-facilitation capacity rather than to seize control. The enumerated categories include: an underwriter registered with the Board, by way of allotment pursuant to an underwriting agreement under SEBI's issue regulations; a stock broker on behalf of clients in the ordinary course; a merchant banker or nominated investor in the process of market-making; a person acquiring shares pursuant to a SEBI-approved scheme of safety net; a merchant banker acting as a stabilising agent or the promoter under a green-shoe option; a registered market-maker in the course of market making; and a Scheduled Commercial Bank acting as an escrow agent.

The unifying logic is functional: these acquirers do not acquire for themselves in any meaningful control sense. An underwriter who is forced to take up an under-subscribed issue, or a stabilising agent buying to support a post-IPO price, is performing a market function, not mounting a takeover. The exemption therefore attaches to the capacity in which shares are acquired. Where a person within these categories steps outside that capacity — for instance, retaining underwritten shares as a strategic stake rather than disposing of them in the ordinary course — the protection of clause (b) does not extend, and an independent trigger analysis must be conducted.

Acquisitions at subsequent stages and pre-disclosed staggered deals — Regulation 10(1)(c)

Regulation 10(1)(c) exempts acquisitions at a subsequent stage by an acquirer who has already made an open offer, and acquisitions pursuant to an agreement where the transaction is being implemented in stages — provided the full intent, the identity of the acquirer and seller, and the complete contractual arrangement were disclosed in the original public announcement and letter of offer. The condition is one of transparency and identity-continuity: the buyer and seller must remain the same, and the staged acquisition must have been disclosed upfront.

The provision recognises that some acquisitions are inherently multi-tranche — a strategic investor may agree to acquire in calibrated steps for regulatory, financing or foreign-investment reasons. Requiring a fresh open offer at each tranche would be wasteful where public shareholders were fully informed at the outset and given their exit opportunity in the first offer. The exemption thus rewards complete front-loaded disclosure. Where the later acquisition deviates — a different counterparty, an undisclosed leg, or a fresh agreement — clause (c) cannot be invoked and the later stage stands on its own feet under Regulation 3 or 4.

Schemes of arrangement, mergers and demergers — Regulation 10(1)(d)

Regulation 10(1)(d) is the structurally most important exemption for M&A practitioners. It exempts acquisitions pursuant to schemes in three baskets. Sub-clause (i) covers a scheme made under any statute or regulation, Indian or foreign — for example, a regulator-mandated restructuring. Sub-clause (ii) covers a scheme of arrangement or reconstruction, including amalgamation, merger or demerger, involving the target company as a transferor or transferee, pursuant to an order of a court or competent authority under any law, Indian or foreign. Sub-clause (iii) covers a scheme not directly involving the target company as transferor or transferee — typically a scheme at the holding-company or group level — subject to two stringent conditions.

Those two conditions, which apply to the (iii) limb, are: (A) the component of cash and cash equivalents in the consideration paid under the scheme must be less than twenty-five per cent of the consideration paid under the scheme; and (B) after implementation of the scheme, persons directly or indirectly holding at least thirty-three per cent of the voting rights in the combined entity must be the same as the persons who held the entire voting rights before the implementation. These conditions ensure that the upstream scheme is a genuine corporate reorganisation rather than a disguised cash buyout that shifts control while bypassing the offer mechanism. The 33%-continuity and sub-25%-cash limbs together test whether the same hands remain in control and whether the deal is essentially share-for-share rather than a cash takeover dressed as a merger.

A 2019 amendment realigned the treatment of schemes directly involving the target (the (ii) limb) to dovetail with the listing-regulation scheme-approval framework, reflecting SEBI's tightening of oversight over court-sanctioned schemes used to engineer control changes. The interaction of Regulation 10(1)(d) with the indirect acquisition framework is a frequent examination theme: an upstream scheme can be both an indirect acquisition under Regulation 5 and an exempt scheme under 10(1)(d), and the conditions of the latter determine whether the offer is excused.

Delisting, SARFAESI, transmission and other statutory acquisitions — Regulation 10(1)(e) to (h)

The remaining limbs of Regulation 10(1) exempt acquisitions arising under other dedicated statutory regimes, on the principle that those regimes already provide their own investor-protection or exit machinery. Acquisitions pursuant to the SEBI (Delisting of Equity Shares) Regulations are exempt, because delisting carries its own reverse-book-building exit price for public shareholders. Acquisitions by securitisation or asset-reconstruction companies, or by secured creditors enforcing security, under the SARFAESI Act, 2002 are exempt, reflecting the recovery imperative that overrides the offer obligation. Acquisitions pursuant to transmission, succession or inheritance are exempt, since these are involuntary, operation-of-law transfers with no acquisitive intent. Acquisitions of voting rights or preference shares carrying voting rights only by reason of operation of the relevant statutory provision, and acquisitions under the conversion of debt into equity by lenders, are similarly relieved subject to the conditions specified.

The conversion-of-debt exemption is of growing practical importance. Lenders converting loans into equity under a strategic debt restructuring or resolution framework can cross the 25% threshold or acquire control without an open offer, provided the conversion is pursuant to the applicable RBI/lending framework and the prescribed pricing and lock-in conditions are met. The animating idea across (e) to (h) is deference: where another statute supplies its own protective mechanism or the transfer is involuntary, layering a takeover open offer on top would be redundant or perverse.

Increase from buy-back — Regulation 10(2) and 10(3)

A buy-back by the target company reduces its total share capital, which mechanically increases the percentage voting rights of shareholders who did not tender. A passive shareholder can thus be pushed across the 25% threshold or beyond the 5% creeping limit through no acquisition of his own. Regulation 10(2) and 10(3) address this. The exemption permits the resulting passive increase without an open offer, but is fenced by conditions designed to ensure the shareholder does not exploit the buy-back to entrench or expand control.

Where the increase results from a buy-back, the shareholder is exempt provided he had not voted in favour of the buy-back resolution; and where the increase takes him above the relevant threshold, he must, within ninety days of the increase, bring his holding back below the threshold, failing which the exemption lapses and the offer obligation crystallises. The conditions also require that the increase does not result in acquisition of control. The combined effect is that a shareholder may temporarily ride a buy-back-induced bump but cannot convert a passive arithmetical increase into a permanent consolidation of control without either reducing his stake or making an offer.

Rights issues — Regulation 10(4)(a) and 10(4)(b)

Regulation 10(4) deals with increases arising in a rights issue. Two situations are distinguished. Under 10(4)(a), an increase in voting rights pursuant to a rights issue, to the extent of the acquirer's entitlement computed on his pre-issue shareholding, is exempt. This is intuitive: subscribing to one's proportionate entitlement merely maintains relative position and is the very mechanism by which a rights issue avoids dilution; it cannot fairly be treated as a control-seizing acquisition.

Under 10(4)(b), acquisition beyond entitlement — by subscribing to shares renounced by other shareholders or otherwise picking up the under-subscribed portion — is also exempt, but only if two conditions are satisfied: (i) the acquirer must not have renounced any of his own entitlement; and (ii) the price at which the shares are issued must not be higher than the ex-rights price of the shares of the target company. The ex-rights price condition prevents the rights issue from being used to allot cheap shares to an acquirer at the expense of the public float, and the no-renunciation condition prevents an acquirer from gaming the structure by dumping his own entitlement while scooping up others'. If either condition fails, the excess acquisition falls outside 10(4)(b) and may trigger an offer under Regulation 3.

Where control complicates the exemption: Subhkam and NDTV

Several Regulation 10 exemptions carry an express condition that the transaction must not result in 'acquisition of control', which throws the meaning of control directly into the exemption analysis. The leading authority is Subhkam Ventures (I) Private Limited v. SEBI, decided by the SAT on 15 January 2010 (Appeal No. 8 of 2009). Subhkam had acquired a minority stake in MSK Projects (India) Limited along with affirmative voting rights — vetoes over major decisions such as changes to the business plan and appointment of key personnel. SEBI treated these rights as conferring control and demanded an open offer. The SAT disagreed, drawing a now-famous distinction between positive control (the proactive power to direct management and steer the company) and negative control (mere protective, reactive vetoes). It held that protective affirmative rights, designed to safeguard a minority investor's investment, do not amount to control under the Takeover Code, which contemplates a proactive and not a reactive power.

The precedential weight of Subhkam is qualified. On SEBI's appeal, the Supreme Court disposed of the matter — the investor having by then divested — keeping the question of law open and expressly directing that the SAT order 'will not be treated as a precedent.' Nonetheless, the positive/negative control construct revived in the SAT's 2022 ruling in the NDTV / RRPR Holding matter concerning the VCPL loan agreements, where the Tribunal found that the combination of call options, conversion rights and purchase options did not amount to VCPL acquiring indirect control of NDTV. For exemption purposes, the lesson is that whether a transaction 'results in acquisition of control' — and therefore whether a control-conditioned exemption survives — turns on this contested positive/negative distinction.

Reporting obligations attached to exemptions — Regulation 10(5), (6) and (7)

An automatic exemption is not a free pass from disclosure. Regulation 10 imposes a structured reporting regime so that the market and the regulator can verify, after the fact, that the conditions were genuinely met. Under Regulation 10(5), in respect of acquisitions under specified clauses, the acquirer must, at least four working days prior to the date of the proposed acquisition, intimate the stock exchanges where the shares of the target are listed, giving the details of the proposed acquisition; the exchanges disseminate this immediately. Under Regulation 10(6), the acquirer who has taken benefit of certain exemptions must file a report with the stock exchanges within four working days of the acquisition, in the prescribed format.

Under Regulation 10(7), in respect of acquisitions made under specified sub-regulations, the acquirer must, within twenty-one working days of the date of acquisition, submit a report to the Board in the prescribed format, accompanied by the prescribed fee. These timelines — four working days advance intimation, four working days post-acquisition report to the exchange, twenty-one working days report to SEBI — are exam-favourites and must be memorised precisely. Failure to report, even where the substantive exemption was validly available, is itself a violation attracting penalty; the exemption from the open offer does not carry with it an exemption from the reporting. Compliance with the Chapter V disclosure obligations under Regulations 29 to 31 is, additionally, a substantive pre-condition of several of the exemptions themselves.

Regulation 10 versus Regulation 11: automatic exemption distinguished from discretionary relief

It is essential to distinguish the automatic exemptions of Regulation 10 from the discretionary exemptions of Regulation 11. Regulation 10 operates by force of law — the acquirer who satisfies the conditions need not approach the Board at all; he simply transacts and reports. Regulation 11, by contrast, empowers SEBI, on an application by the acquirer or target and for reasons recorded in writing, to grant exemption from the open offer obligation or relaxation from strict compliance, in the interests of investors and the securities market, subject to such conditions as the Board deems fit. Regulation 11 relief is the route for transactions that do not fit any Regulation 10 box but are nevertheless meritorious — for instance, government disinvestment, statutory restructurings of public sector banks, or bespoke promoter reorganisations.

SEBI's body of Regulation 11 exemption orders — including high-profile reliefs for State Government acquisitions and bank recapitalisations — shows the Board weighing the absence of any change in beneficial control, the protection of public shareholders, and the wider market interest. In an answer on Regulation 10, the discipline is to confine yourself to the enumerated automatic categories and their conditions, and to flag Regulation 11 only as the residual discretionary safety net. Confusing the two — for example, claiming that an inter se transfer 'requires SEBI approval' — is a frequent and penalised error, since the whole point of Regulation 10(1)(a) is that it does not.

The interpretive principle: exemptions are construed strictly

The recurring jurisprudential thread through every Regulation 10 dispute is that exemptions from a beneficial, investor-protective regulation are construed strictly against the person claiming them. The open offer exists to give public shareholders an exit at a fair price when control shifts; an exemption deprives them of that exit. Tribunals therefore insist that an acquirer claiming exemption demonstrate compliance with every condition, and resolve genuine ambiguity in favour of the offer obligation rather than the exemption. Arbutus Consultancy LLP is the clearest articulation: the three-year requirement was applied to the letter, predecessor-company tenure was disallowed, and the purposive gloss of an informal guidance was set aside.

For the aspirant, the practical method follows from this principle. Identify the trigger first — has Regulation 3 or 4 been crossed? Then test the claimed exemption condition by condition, treating each as a cumulative requirement, not a menu. Verify pricing limbs (the 25% VWAP cap for inter se transfers, the ex-rights price cap for over-entitlement rights subscriptions, the sub-25% cash limb for upstream schemes), verify holding-period limbs (the three-year promoter/PAC rule), verify continuity limbs (the 33% combined-entity continuity for schemes, identity-continuity for staged deals), and verify the reporting limbs (the four-day and twenty-one-day timelines). Only when every applicable condition is satisfied is the open offer genuinely excused. The companion chapters on the trigger for open offer and the 25% threshold supply the trigger side of this two-step analysis, and the subject hub ties the framework together.